##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION    Form 10-Q  [X]
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period
ended June 30, 2004  [  ]
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 000-2791   ELECTRIC CITY CORP.  Delaware
(State or other jurisdiction of incorporation or organization)
    
    36-4197337
(I.R.S. Employer Identification No.)
 1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410
(Address of principal executive offices) (847) 437-1666
(Issuers telephone number)    Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act) Yes [  ] No [X] 41,107,022 shares of the registrants common stock, $.0001 par value per share, were outstanding
as of June 30, 2004.




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ELECTRIC CITY CORP.
FORM 10-Q
For The Quarter Ended June 30, 2004 INDEX  
 PageNumberPart I            Financial InformationITEM 1. Financial Statements:Condensed Consolidated Balance Sheets June 30, 2004 (unaudited) and December 31, 2003
    
    
    1Condensed Consolidated Statement of Operations Three Months Ended June 30, 2004 and 2003 (unaudited)
    
    
    3Condensed Consolidated Statement of Operations Six Months Ended June 30, 2004 and 2003 (unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity Six Months Ended June 30, 2004 (unaudited)
    
    
    5Condensed Consolidated Statement of Cash Flows Six Months Ended June 30, 2004 and 2003 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25ITEM 4. Control and Procedures
    
    
    25Part II. Other Information:ITEM 2. Changes in Securities
    
    
    26ITEM 4 Submission of Matters to a Vote of Security Holders
    
    
    26ITEM 6. Exhibits and Reports on Form 8-K
    
    
    27Signatures
    
    
    28CertificationCertificationCertificationCertification




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PART I - FINANCIAL INFORMATION 
 ITEM 1. Financial Statements ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED BALANCE SHEET
 June 302004
    
    December 31,(unaudited)
    
    2003 (1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    3,860,205
    
    
    $
    2,467,023Accounts receivable, net
    
    
    1,138,564
    
    
    
    1,450,811Inventories
    
    
    1,429,243
    
    
    
    1,200,146Prepaid expenses and other
    
    
    265,970
    
    
    
    203,870Total Current Assets
    
    
    6,693,982
    
    
    
    5,321,850Net Property and Equipment
    
    
    1,115,558
    
    
    
    1,132,592Deferred Financing Costs
    
    
    172,847
    
    
    
    482,612Cost in Excess of Assets Acquired
    
    
    416,573
    
    
    
    416,573$
    8,398,960
    
    
    $
    7,353,627
 - 1 -




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ELECTRIC CITY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET June 30,2004
    
    December 31,(unaudited)
    
    2003 (1)Liabilities and Stockholders EquityCurrent LiabilitiesCurrent maturities of long-term debt
    
    $
    1,146,090
    
    
    $
    536,809Accounts payable
    
    
    939,688
    
    
    
    1,298,821Accrued expenses
    
    
    474,147
    
    
    
    541,588Deferred revenue
    
    
    457,373
    
    
    
    383,308Customer deposits
    
    
    1,000,000
    
    
    
    511,167Total Current Liabilities
    
    
    4,017,298
    
    
    
    3,271,693Deferred Revenue
    
    
    204,166
    
    
    
    229,166Long-Term Debt, less current maturities, net of unamortized
discount of $86,592 and $241,775 at June 30, 2004 and
December 31, 2003, respectively
    
    
    67,333
    
    
    
    811,836Total Liabilities
    
    
    4,288,797
    
    
    
    4,312,695Stockholders EquityPreferred stock, $.01 par value; 5,000,000 shares authorized
    
    
    
    
    
    
    23,966Convertible Series A  0 and 2,396,590 shares issued and
outstanding as of June 30, 2004 and December 31,
2003, respectively (liquidation value of
$47,932,000 as of December 31, 2003)Convertible Series C  0 and 233,614 issued and
outstanding as of June 30, 2004 and December 31, 2003,
respectively (liquidation value of $4,672,000 as of
December 31, 2003)
    
    
    
    
    
    
    2,336Convertible Series D  0 and 157,769 issued and
outstanding as of June 30, 2004 and December 31, 2003,
respectively (liquidation value of $3,155,000 as of
December 31, 2003)
    
    
    
    
    
    
    1,578Convertible Series E  220,380 and 0 issued and
outstanding as of June 30, 2004 and December 31, 2003,
respectively (liquidation value of $44,057,200 and $0
at June 30, 2004 and December 31, 2003, respectively)
    
    
    2,204
    
    
    
    Common stock, $.0001 par value; 120,000,000 shares
authorized, 41,107,022 and 34,342,022 issued as of June
30, 2004 and December 31, 2003, respectively
    
    
    4,112
    
    
    
    3,436Additional paid-in capital
    
    
    54,973,244
    
    
    
    51,376,137Accumulated deficit
    
    
    (50,869,397
    )
    
    
    (48,366,521
    )Total Stockholders Equity
    
    
    4,110,163
    
    
    
    3,040,932$
    8,398,960
    
    
    $
    7,353,627
 See accompanying notes to condensed consolidated financial statements  (1)
    
    Derived from audited financial statements in the Companys annual
report onForm 10-KSBfor the year ended December 31, 2003 - 2 -




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##### Table of Contents



ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 Three months ended, June 30
    
    2004
    
    2003Revenue
    
    $
    555,537
    
    
    $
    1,668,721ExpensesCost of sales
    
    
    597,082
    
    
    
    1,499,940Selling, general and administrative
    
    
    974,470
    
    
    
    1,103,0111,571,552
    
    
    
    2,602,951Operating loss
    
    
    (1,016,015
    )
    
    
    (934,230
    )Other Income (Expense)Interest income
    
    
    7,372
    
    
    
    1,320Interest expense
    
    
    (136,505
    )
    
    
    (12,338
    )Total other income (expense)
    
    
    (129,133
    )
    
    
    (11,018
    )Loss from continuing operations
    
    
    (1,145,148
    )
    
    
    (945,248
    )Discontinued OperationsLoss from discontinued operations
    
    
    
    
    
    
    (57,691
    )Loss on disposal of discontinued operations
    
    
    
    
    
    
    (764,148
    )
    
    
    
    (821,839
    )Net Loss
    
    
    (1,145,148
    )
    
    
    (1,767,087
    )Plus Preferred Stock Dividends
    
    
    (622,884
    )
    
    
    (999,252
    )Net Loss Available to Common Shareholder
    
    $
    (1,768,032
    )
    
    $
    (2,766,339
    )Basic and
diluted loss per common share from continuing operations
    
    $
    (0.04
    )
    
    $
    (0.06
    )Discontinued operations
    
    
    
    
    
    
    (0.02
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.04
    )
    
    $
    (0.08
    )Weighted Average Common Shares Outstanding
    
    
    40,938,395
    
    
    
    33,964,174
 See accompanying notes to condensed consolidated financial statements - 3 -




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ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 Six months ended, June 30
    
    2004
    
    2003Revenue
    
    $
    1,371,779
    
    
    $
    2,819,474ExpensesCost of sales
    
    
    1,383,091
    
    
    
    2,616,443Selling, general and administrative
    
    
    2,002,109
    
    
    
    2,124,3383,385,200
    
    
    
    4,740,781Operating loss
    
    
    (2,013,421
    )
    
    
    (1,921,307
    )Other Income (Expense)Interest income
    
    
    11,736
    
    
    
    2,987Interest expense
    
    
    (501,191
    )
    
    
    (26,445
    )Total other income (expense)
    
    
    (489,455
    )
    
    
    (23,458
    )Loss from continuing operations
    
    
    (2,502,876
    )
    
    
    (1,944,765
    )Discontinued OperationsLoss from discontinued operations
    
    
    
    
    
    
    (302,503
    )Loss on disposal of discontinued operations
    
    
    
    
    
    
    (764,148
    )
    
    
    
    (1,066,651
    )Net Loss
    
    
    (2,502,876
    )
    
    
    (3,011,416
    )Plus Preferred Stock Dividends
    
    
    (3,786,905
    )
    
    
    (1,833,244
    )Net Loss Available to Common Shareholder
    
    $
    (6,289,781
    )
    
    $
    (4,844,660
    )Basic and diluted loss per common share from
continuing operations
    
    $
    (0.16
    )
    
    $
    (0.11
    )Discontinued operations
    
    
    
    
    
    
    (0.03
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.16
    )
    
    $
    (0.14
    )Weighted Average Common Shares Outstanding
    
    
    38,244,878
    
    
    
    33,326,572
 See accompanying notes to condensed consolidated financial statements - 4 -




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ELECTRIC CITY CORP. 
 STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS EQUITY
 (Unaudited)
 Series A
    
    Series A
    
    Series C
    
    Series C
    
    Series DCommon
    
    Common
    
    Preferred
    
    Preferred
    
    Preferred
    
    Preferred
    
    PreferredShares
    
    Stock
    
    Shares
    
    Stock
    
    Shares
    
    Stock
    
    SharesBalance,December 31, 2003
    
    
    34,342,022
    
    
    $
    3,436
    
    
    
    2,396,590
    
    
    $
    23,966
    
    
    
    233,614
    
    
    $
    2,336
    
    
    
    157,769Issuance of common stock (net
of offering costs of $897,135)
    
    
    5,000,000
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Series A Preferred Stock
    
    
    1,450,000
    
    
    
    145
    
    
    
    (145,000
    )
    
    
    (1,450
    )
    
    
    
    
    
    
    
    
    
    
    Redemption of preferred stock
    
    
    
    
    
    
    
    
    
    
    (514,375
    )
    
    
    (5,144
    )
    
    
    
    
    
    
    
    
    
    
    (24,087
    )Exchange of preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,737,215
    )
    
    
    (17,372
    )
    
    
    (233,614
    )
    
    
    (2,336
    )
    
    
    (133,682
    )Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Satisfaction of accrued dividends through
the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of term note
    
    
    130,000
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants
    
    
    185,000
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for the three months ended
June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance,June 30, 2004
    
    
    41,107,022
    
    
    $
    4,112
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
   [Continued from above table, first column(s) repeated] Series D
    
    Series E
    
    Series E
    
    Additional
    
    
    
    
    
    TotalPreferred
    
    Preferred
    
    Preferred
    
    Paid-in
    
    Accumulated
    
    StockholdersStock
    
    Shares
    
    Stock
    
    Capital
    
    Deficit
    
    EquityBalance,December 31, 2003
    
    $
    1,578
    
    
    
    
    
    
    $
    
    
    
    $
    51,376,137
    
    
    $
    (48,366,521
    )
    
    $
    3,040,932Issuance of common stock (net
of offering costs of $897,135)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,102,365
    
    
    
    
    
    
    
    10,102,865Conversion of Series A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,305
    
    
    
    
    
    
    
    Redemption of preferred stock
    
    
    (241
    )
    
    
    
    
    
    
    
    
    
    
    (6,994,621
    )
    
    
    
    
    
    
    (7,000,006
    )Exchange of preferred stock
    
    
    (1,337
    )
    
    
    210,451
    
    
    
    2,105
    
    
    
    18,940
    
    
    
    
    
    
    
    Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (983,500
    )
    
    
    
    
    
    
    (983,500
    )Satisfaction of accrued dividends through
the issuance of preferred stock
    
    
    
    
    
    
    9,835
    
    
    
    98
    
    
    
    983,402
    
    
    
    
    
    
    
    983,500Conversion of term note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275,587
    
    
    
    
    
    
    
    275,600Exercise of warrants
    
    
    
    
    
    
    94
    
    
    
    1
    
    
    
    193,629
    
    
    
    
    
    
    
    193,648Net loss for the three months ended
June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,502,876
    )
    
    
    (2,502,876
    )Balance,June 30, 2004
    
    $
    
    
    
    
    220,380
    
    
    $
    2,204
    
    
    $
    54,973,244
    
    
    $
    (50,869,397
    )
    
    $
    4,110,163
 See accompanying notes to condensed consolidated financial statements. - 5 -




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##### Table of Contents



ELECTRIC CITY CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six months ended June 30
    
    2004
    
    2003Cash Flow from Operating ActivitiesNet loss
    
    $
    (2,502,876
    )
    
    $
    (3,011,416
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of asset disposalsDepreciation and amortization
    
    
    28,838
    
    
    
    79,972Recovery on bad debt
    
    
    
    
    
    
    (55,000
    )Warrants issued in exchange for services received
    
    
    
    
    
    
    199,100Loss from disposal of discontinued operations
    
    
    
    
    
    
    764,148Amortization of deferred financing costs
    
    
    309,765
    
    
    
    Amortization of original issue discount
    
    
    155,183
    
    
    
    Accrued interest converted to common stock
    
    
    4,736
    
    
    
    Changes in assets and liabilities, net of dispositionsAccounts receivable
    
    
    312,247
    
    
    
    (1,408,412
    )Inventories
    
    
    (229,097
    )
    
    
    604,330Other current assets
    
    
    (62,100
    )
    
    
    (29,799
    )Accounts payable
    
    
    (359,133
    )
    
    
    217,720Accrued expenses
    
    
    (67,440
    )
    
    
    (137,171
    )Deferred revenue
    
    
    49,065
    
    
    
    47,548Customer deposits
    
    
    488,833
    
    
    
    Net cash used in operating activities
    
    
    (1,871,979
    )
    
    
    (2,728,980
    )Cash Flows Used In Investing ActivitiesSale of discontinued operations
    
    
    
    
    
    
    929,032Purchase of property and equipment
    
    
    (11,804
    )
    
    
    (15,289
    )Net cash (used in) provided by investing activities
    
    
    (11,804
    )
    
    
    913,743Cash Flows Provided by (Used in) Financing ActivitiesNet payment on line of credit
    
    
    
    
    
    
    (500,000
    )Proceeds from long-term debt
    
    
    
    
    
    
    10,000Payment on long-term debt
    
    
    (19,542
    )
    
    
    (364,281
    )Preferred stock redemption
    
    
    (7,000,006
    )
    
    
    1,500,000Proceeds from issuance of common stock
    
    
    11,000,000
    
    
    
    1,669,914Issuance costs related to stock issuances
    
    
    (897,135
    )
    
    
    (301,290
    )Proceeds from exercise of warrants
    
    
    193,648
    
    
    
    27,000Short-swing profit contribution
    
    
    
    
    
    
    798Net cash provided by financing activities
    
    
    3,276,965
    
    
    
    2,042,141Net Increase in Cash and Cash Equivalents
    
    
    1,393,182
    
    
    
    226,904Cash and Cash Equivalents, at beginning of period
    
    
    2,467,023
    
    
    
    1,555,904Cash and Cash Equivalents, at end of period
    
    $
    3,860,205
    
    
    $
    1,782,808Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest
    
    $
    41,126
    
    
    $
    28,548Cash paid during the periods for interest  discontinued operations
    
    
    
    
    
    
    8,702Supplemental Disclosures of Noncash Investing and Financing ActivitiesConversion of convertible debt to common stock
    
    $
    270,863
    
    
    $
    Accrued interest satisfied through the issuance of common stock
    
    
    4,736
    
    
    
    In February and March of 2004, certain holders of Series A preferred stock converted 145,000 shares of
Series A preferred stock into 1,450,000 shares of the Companys common stock.
 See accompanying notes to condensed consolidated financial statements - 6 -




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##### Table of Contents



Electric City Corp. 
 Notes to Financial Statements
 Note 1  Basis of Presentation The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments), which, in the opinion of management, are necessary for a fair
statement of results for the interim periods. The Company has experienced operating losses and negative cash flow from
operations since inception and currently has an accumulated deficit. At the
rate it is currently consuming cash its cash balances should be sufficient to
fund operations for 8 to 12 months, after which it will need to utilize its
working capital line. Availability under the working capital line will in part
depend on there being sufficient eligible receivables to support the Companys
borrowing needs, the adequacy of which can not be assured. As of June 30, 2004
eligible receivables would support borrowings of approximately $736,000 under
the facility. To date the Company has funded its operations primarily through
the issuance of equity, however, there is no assurance that it will be able to
continue to raise funds in this manner in the future. The Companys ability to
continue as a going concern is ultimately dependent on its ability to increase
sales to a level that will allow it to operate profitably. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of
the Company to continue as a going concern. Please see the liquidity and
capital resources section of Item 2 to this report for additional information
on Managements plan for addressing potential future liquidity concerns. The results of operations for the three and six months ended June 30, 2004 and
2003 are not necessarily indicative of the results to be expected for the full
year. For further information, refer to the audited financial statements and the
related footnotes included in the Electric City Corp. Annual Report on Form
10-KSB, for the year ended December 31, 2003. Note 2 - Stock-based Compensation At June 30, 2004, the Company had a stock-based compensation plan, which is
more fully described in Note 16 in the Companys Annual Report on Form 10-KSB
as filed on March 29, 2004. The Company applies and intends to continue to
apply the recognition and intrinsic value measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for those plans. No
stock-based compensation expense was reflected in the net loss for the three
month or six month periods ended June 30, 2004 or June 30, 2003, as all options
granted under the plan had an exercise price equal to or greater than the
market value of the underlying common stock on the date of the grant. The
following table illustrates the effect on the net loss and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation, to stock-based compensation: - 7 -




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##### Table of Contents



Three Months Ended
    
    Six months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003Net Loss, as reported
    
    $
    (1,145,000
    )
    
    $
    (1,767,000
    )
    
    $
    (2,503,000
    )
    
    $
    (3,011,000
    )Deduct: Stock-based employee
compensation expense included in
reported net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Add: Total stock-based
employee compensation (expense)
income determined under fair value based method for awards1
    
    
    (397,000
    )
    
    
    (83,000
    )
    
    
    (528,000
    )
    
    
    (343,000
    )Net Loss, pro-forma
    
    
    (1,542,000
    )
    
    
    (1,850,000
    )
    
    
    (3,031,000
    )
    
    
    (3,354,000
    )Preferred stock dividends
    
    
    (623,000
    )
    
    
    (999,000
    )
    
    
    (3,787,000
    )
    
    
    (1,833,000
    )Net Loss Available to
Common Shareholder
    
    $
    (2,165,000
    )
    
    $
    (2,849,000
    )
    
    $
    (6,818,000
    )
    
    $
    (5,187,000
    )Net loss per shareBasic and diluted 
as reported
    
    $
    (0.04
    )
    
    
    (0.08
    )
    
    $
    (0.16
    )
    
    
    (0.14
    )Basic and diluted 
pro- forma
    
    $
    (0.05
    )
    
    
    (0.08
    )
    
    $
    (0.17
    )
    
    
    (0.15
    )
  1
    
    All awards refer to awards granted, modified, or settled in fiscal periods beginning after December 15, 1994  that
is, awards for which the fair value was required to be measured and disclosed under Statement 123. Note 3 - Recent Accounting Pronouncements In March, 2004, the FASB issued an exposure document entitled Share-Based
Payment - an amendment of Statements No. 123 and 95 (Proposed Statement of
Financial Accounting Standards). The proposed Statement would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25 and generally require instead that such transactions be accounted for
using a fair-value-based method. This accounting, if approved, will result in
compensation expense charges to our future results of operations. The proposed
Statement, if adopted, would be applied to public entities prospectively for
fiscal years beginning after December 15, 2004, as if all share-based
compensation awards granted, modified, or settled after December 15, 1994, had
been accounted for using the fair-value method of accounting. Retrospective
application of the proposed Statement is not permitted. Note 4  Net Loss Per Share The Company computes loss per share under Statement of Financial Accounting
Standards (SFAS) No. 128 Earnings Per Share, which requires presentation of
two amounts: basic and diluted loss per - 8 -




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##### Table of Contents



common share. Basic loss per common share is computed by dividing loss
available to common stockholders by the number of weighted average common
shares outstanding, and includes all common stock issued. Diluted earnings
would include all common stock equivalents. The Company has not included the
outstanding options, warrants or shares issuable upon conversion of the
preferred stock and convertible debt as common stock equivalents in the
computation of diluted loss per share for the three and six months ended June
30, 2004 and 2003 because the effect would be antidilutive. The following table sets forth the weighted average shares issuable upon
exercise of outstanding options and warrants and conversion of preferred stock
and convertible debt that are not included in the basic and diluted loss per
share available to common stockholders because to do so would be antidilutive: Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003Weighted average
shares issuable
upon exercise of
outstanding options
    
    
    10,574,000
    
    
    
    10,316,000
    
    
    
    10,496,000
    
    
    
    10,264,000Weighted average
shares issuable
upon exercise of
outstanding
warrants
    
    
    11,157,000
    
    
    
    8,990,000
    
    
    
    10,407,000
    
    
    
    8,828,000Weighted average
shares issuable
upon conversion of
preferred stock
    
    
    21,712,000
    
    
    
    24,497,000
    
    
    
    24,326,000
    
    
    
    24,168,000Weighted average
shares issuable
upon conversion of
convertible debt
    
    
    319,000
    
    
    
    
    
    
    
    334,000
    
    
    
    Total
    
    
    43,762,000
    
    
    
    43,803,000
    
    
    
    45,563,000
    
    
    
    43,260,000
 -9-




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##### Table of Contents



Note 5 - Warranty Obligations The Company warrants to the purchasers of its EnergySaver line of products that
the product will be free of defects in material and workmanship for one year
from the date of installation. The Company records the estimated cost that may
be incurred under its warranties at the time the product revenue is recognized
based upon the relationship between historical and anticipated warranty costs
and sales volumes. The Company periodically assesses the adequacy of its
recorded warranty liability and adjusts the amounts as necessary. While the
Company believes that its estimated liability for product warranties is
adequate and that the judgment applied is appropriate, the estimated liability
for product warranties could differ materially from actual future warranty
costs. Changes in the Companys warranty liability are as follows: Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003Balance, beginning of period
    
    $
    126,735
    
    
    $
    103,445
    
    
    $
    121,702
    
    
    $
    107,127Warranties issued
    
    
    4,000
    
    
    
    31,250
    
    
    
    12,250
    
    
    
    43,500Settlements
    
    
    (2,553
    )
    
    
    (11,803
    )
    
    
    (5,770
    )
    
    
    (27,735
    )Balance, as of June 30
    
    $
    128,182
    
    
    $
    122,892
    
    
    $
    128,182
    
    
    $
    122,892
 Note 6 - Inventories Inventories consisted of the following: June 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    539,375
    
    
    $
    496,906Work in process
    
    
    12,112
    
    
    
    12,817Finished goods
    
    
    877,756
    
    
    
    690,423$
    1,429,243
    
    
    $
    1,200,146
 -10-




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##### Table of Contents



Note 7 - Dividends Dividends are comprised of the following: Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003Accrual of Dividend
on Series A
Convertible
Preferred
    
    $
    
    
    
    $
    556,368
    
    
    $
    540,705
    
    
    $
    1,099,166Accrual of Dividend
on Series C
Convertible
Preferred
    
    
    
    
    
    
    54,233
    
    
    
    53,206
    
    
    
    107,144Accrual of Dividend
on Series D
Convertible
Preferred
    
    
    
    
    
    
    1,667
    
    
    
    35,932
    
    
    
    1,667Accrual of Dividend
on Series E
Convertible
Preferred
    
    
    325,600
    
    
    
    
    
    
    
    353,657
    
    
    
    Deemed dividend
associated with
beneficial
conversion feature
of Series D
Convertible
Preferred Stock
    
    
    
    
    
    
    386,984
    
    
    
    
    
    
    
    386,984Deemed dividend
associated with
beneficial
conversion price on
shares issued in
satisfaction of
convertible
preferred dividends
    
    
    289,784
    
    
    
    
    
    
    
    927,947
    
    
    
    217,119Deemed dividend
associated with the
redemption and
exchange of
outstanding
preferred stock
    
    
    
    
    
    
    
    
    
    
    1,860,458
    
    
    
    Deemed dividend
associated with
change in the
expiration date of
warrants to
purchase shares of
preferred stock
    
    
    7,500
    
    
    
    
    
    
    
    15,000
    
    
    
    21,164Total
    
    $
    622,884
    
    
    $
    999,252
    
    
    $
    3,786,905
    
    
    $
    1,833,244
 -11-




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##### Table of Contents



Note 8 - Business Segment Information The Company organizes and manages its business in two distinct segments: the
Energy Technology segment, and the Building Control and Automation segment. In
classifying its operational entities into a particular segment, the Company
segregated its businesses with similar economic characteristics, products and
services, production processes, customers, and methods of distribution into
distinct operating groups. The Energy Technology segment designs, manufactures and markets energy saving
technologies, primarily to commercial and industrial customers. The principal
products produced and marketed by this segment are the EnergySaver, the Global
Commander and negative power systems under the trade name, Virtual Negawatt
Power Plan or VNPP. This segment is headquartered, and most of its
operations are located, in Elk Grove Village, Illinois. The Building Control and Automation segment, which is comprised of our Great
Lakes Controlled Energy subsidiary, provides integration of building and
environmental control systems for commercial and industrial customers. Great
Lakes Controlled Energy is headquartered in, and operates out of its own
facility, located in Elk Grove Village, Illinois. Prior to fiscal year 2003, the Companys reportable segments included the Power
Management segment, which designed, manufactured and marketed a wide range of
commercial and industrial switching gear and distribution panels. Effective
May 31, 2003, the Company divested this segment, accordingly, the operating
results have been separately reported as discontinued operations. Prior year
segment information has been restated to reflect corporate costs previously
allocated to the Power Management segment, which will continue despite the
divestiture of the segment. The following is the Companys business segment information: Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003Revenues:Energy Technology
    
    $
    173,000
    
    
    $
    1,081,000
    
    
    $
    496,000
    
    
    $
    1,566,000Building Automation
Controls
    
    
    409,000
    
    
    
    610,000
    
    
    
    902,000
    
    
    
    1,286,000Intercompany sales -
Energy Technology
    
    
    (25,000
    )
    
    
    (15,000
    )
    
    
    (25,000
    )
    
    
    (20,000
    )Intercompany
sales 
Building Control and
Automation
    
    
    (1,000
    )
    
    
    (7,000
    )
    
    
    (1,000
    )
    
    
    (13,000
    )Total
    
    
    556,000
    
    
    
    1,669,000
    
    
    
    1,372,000
    
    
    
    2,819,000Operating Loss:Energy Technology
    
    
    (520,000
    )
    
    
    (318,000
    )
    
    
    (1,033,000
    )
    
    
    (839,000
    )Building Automation
Controls
    
    
    (124,000
    )
    
    
    (172,000
    )
    
    
    (232,000
    )
    
    
    (300,000
    )Corporate Overhead
    
    
    (372,000
    )
    
    
    (444,000
    )
    
    
    (749,000
    )
    
    
    (782,000
    )Total
    
    
    (1,016,000
    )
    
    
    (934,000
    )
    
    
    (2,014,000
    )
    
    
    (1,921,000
    )Other Expense
    
    
    (129,000
    )
    
    
    (11,000
    )
    
    
    (489,000
    )
    
    
    (23,000
    )Loss from continuing
operations
    
    
    (1,145,000
    )
    
    
    (945,000
    )
    
    
    (2,503,000
    )
    
    
    (1,944,000
    )
 -12-




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##### Table of Contents



June 30,
    
    December2003
    
    31, 2003Total Assets:Energy Technology
    
    $
    7,139,000
    
    
    $
    5,824,000Building Automation
Controls
    
    
    1,260,000
    
    
    
    1,530,000Total
    
    $
    8,399,000
    
    
    $
    7,354,000
 Note 9  Private Placement and Redemption and Exchange Offer On March 19, 2004, the Company entered into a securities purchase agreement
with a group of four mutual funds managed by Security Benefit Group, Inc.
(Security Benefit), whereby the Company issued to such purchasers, in
exchange for $11,000,000 in gross proceeds, a package of securities that
included 5,000,000 shares of the Companys common stock and 5 year warrants to
purchase 1,750,000 additional shares of common stock at $2.42 per share in cash
(the Common Stock Warrants). The exercise price under the Common Stock
Warrants is subject to adjustment if the Company issues shares of common stock
at a price below the lower of the exercise price or the market price at the
time. Also on March 19, 2004, the Company entered into a Redemption and Exchange
Agreement with the holders of its outstanding Series A Convertible Preferred
Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred
Stock (collectively, the Existing Preferred Stock) under which the Company
agreed to redeem 538,462 shares of Existing Preferred Stock at a price of $13
per share (the Redemption) and to exchange shares of its newly authorized
Series E Convertible Preferred Stock (the Series E Preferred) for all
remaining outstanding shares of Existing Preferred Stock (the Exchange) on a
1 for 10 basis (one share of Series E Preferred exchanged for 10 shares of
Existing Preferred Stock). The Company used $7 million of the proceeds from
the issuance of securities to Security Benefit to accomplish the Redemption,
which closed on March 22, 2004. Under the Redemption and Exchange transaction, the Company redeemed 538,462
shares of its outstanding Existing Preferred Stock (which were convertible into
5,384,620 shares of common stock), at a price equivalent to $1.30 per common
share, and exchanged 210,451 shares of the new Series E Preferred) for the
remaining 2,104,509 outstanding shares of the Existing Preferred Stock. All of
the Existing Preferred Stock has been cancelled. The Series E Preferred has
substantially the same rights as the shares of Existing Preferred Stock that it
replaced, including:  
    
    special approval rights in respect of certain actions by the
Company, including any issuance of shares of capital stock by the
Company that would have the right to receive dividends or the right to
participate in any distribution upon liquidation which was senior to or
equal to the rights of the Series E Preferred (other than issuances to
pay dividends on the preferred and under certain other limited
exceptions such as conversion of outstanding convertible securities)
and any acquisition, sale, merger, joint venture, consolidation or
reorganization involving the Company or any of its subsidiaries;  
    
    a conversion price equivalent to $1.00 per share;  
    
    the right to elect up to four directors;  
    
    the right to vote with the holders of common stock on an as
converted basis on all matters on which holders of our common stock
are entitled to vote, except with respect to the election of directors
or as otherwise provided by law; -13-




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
    
    a right of first offer on the sale of equity by the Company in a
private transaction; and
    
    anti-dilution protection that would adjust the conversion price in
the event we issue equity at a price which is less than the conversion
price . The Exchange was effected on a 1 for 10 basis: whereas each share of the
Existing Preferred Stock was convertible into 10 shares of Common Stock and had
a liquidation preference of $20 per share, each share of the Series E Preferred
is convertible into 100 shares of Common Stock and has a liquidation preference
of $200 per share. As part of the Exchange, all outstanding warrants to
purchase shares of Series D Convertible Preferred Stock were exchanged for
similar warrants to purchase shares of Series E Preferred, but the expiration
date was extended from June 30, 2004 to October 31, 2004, which was
subsequently extended to December 31, 2004. Such Series E warrants issued are
exercisable for an aggregate of 3,750 shares of Series E Preferred at a price
of $100 per share. They replaced warrants exercisable for 37,500 shares of
Series D Preferred at an exercise price of $10 per share. In addition the Existing Preferred Stock carried a dividend rate of 10% payable
at the Companys election in cash or in additional shares of preferred stock
during the first three years following issuance. After the third anniversary
of issuance we were required to pay all dividends in cash and the dividend rate
increased by 1/2% every six months until it reached 15%, where it would remain
until the shares were converted or redeemed. The Series E Preferred carries a
6% dividend that is payable at the Companys election in cash or additional
shares of Series E Preferred for as long as the shares remain outstanding. The following table summarizes the change in outstanding shares that resulted
from this series of transactions as of March 22, 2004: Number of Shares (1)Prior to
    
    After theTransactions
    
    Transactions
    
    ChangePreferred A
    
    
    22,515,890
    
    
    
    0
    
    
    
    (22,515,890
    )Preferred C
    
    
    2,336,130
    
    
    
    0
    
    
    
    (2,336,130
    )Preferred D
    
    
    1,577,690
    
    
    
    0
    
    
    
    (1,577,690
    )Preferred E
    
    
    0
    
    
    
    21,046,900
    
    
    
    21,046,900Total preferred
    
    
    26,429,710
    
    
    
    21,046,900
    
    
    
    (5,382,810
    )Common stock
    
    
    35,922,022
    
    
    
    40,922,022
    
    
    
    5,000,000Total shares outstanding
    
    
    62,351,732
    
    
    
    61,968,922
    
    
    
    (382,810
    )Total shares issuable
under outstanding options
and warrants
    
    
    19,992,048
    
    
    
    21,742,048
    
    
    
    1,750,000Total shares issued or
issuable as of March 22,
2004
    
    
    82,343,780
    
    
    
    83,710,970
    
    
    
    1,367,190
  (1)
    
    All shares presented on an as converted basis The dilutive effect of the payment-in-kind dividend on the preferred stock will
be reduced significantly as a result of the Redemption and Exchange because of
the lower dividend rate on the Series E Preferred -14-




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##### Table of Contents



stock. Based on the terms
and number of shares of the Existing Preferred outstanding prior to the
Redemption and Exchange, if the Company continued to pay preferred dividends by
issuing additional
preferred shares, the Company would have issued shares of preferred stock
convertible into 10,306,790 shares of common stock over the next three years,
whereas it only expects to issue shares of Series E preferred convertible into
4,473,919 shares of common stock over the same period, a reduction of 5,832,871
shares or 56.6%. As part of the Redemption and Exchange, the preferred stockholders agreed to
amend and restate their existing stock trading agreements, effectively
replacing them with a new three year agreement containing volume and price
limitations which become effective on September 8, 2004 after the original
expiration date of September 7, 2004. The Investor Rights Agreement and the
Stockholders Agreement among the Company, the preferred stockholders and
certain other parties were also amended and restated as part of the Redemption
and Exchange, principally to reflect the changes in the outstanding preferred
stock resulting from the transactions. For accounting purposes the Redemption and Exchange transaction was viewed as a
redemption for cash and shares of Series E preferred stock. As a result of the
transaction the Company incurred a non-cash deemed dividend of $1,860,458.
This non-cash deemed dividend was determined by comparing the fair value of the
consideration given (the cash and the market value of the Series E Preferred)
to the carrying value of the Existing Preferred Stock. The fair value of the
consideration given exceeded the carrying value of the Existing Preferred
primarily due to the fact that the market price of the Companys common stock
was higher on the day the Redemption and Exchange transaction closed than it
was when the Existing Preferred Stock was originally issued. The deemed
dividend was recorded as offsetting charges and credits to additional paid-in
capital, without any effect on total stockholders equity. Morgan Keegan & Company, Inc. acted as placement agent for the Company with
respect to the transaction and was paid a placement agent fee of $660,000. The
Stockpage.com was also paid a finders fee of $55,000 and William Blair & Co.
was paid a consulting fee of $75,000 related to the transaction. Other
issuance costs related to the transaction totaled $107,135. Note
10  Equity Issuances On January 2, 2004, Laurus Master Funds converted $63,600 of principal on the
Companys Convertible Term Note into 30,000 shares of common stock. On January 28, 2004, Laurus Master Funds converted $207,263 of principal and
$4,737 of accrued interest on the Companys Convertible Term Note into 100,000
shares of common stock. On February 10, 2004, a holder of the Companys Series A Convertible Preferred
Stock converted 45,000 shares of Series A Convertible Preferred Stock into
450,000 shares of common stock. On March 19, 2004, two holders of the Companys Series A Convertible Preferred
Stock converted 100,000 shares of Series A Convertible Preferred Stock into
1,000,000 shares of common stock. On March 19, 2004, the Company entered into a securities purchase agreement
with a group of four mutual funds managed by Security Benefit Group, Inc., as
described in Note 9 above. On March 19, 2004, the Company entered into a Redemption and Exchange Agreement
with the holders of its outstanding Series A Convertible Preferred Stock,
Series C Convertible Preferred Stock and Series D Convertible Preferred Stock
as described in Note 9 above. -15-




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##### Table of Contents



On April 7, 2004, the Board of Directors declared dividends payable on our
Series E Convertible Preferred Stock for the calendar quarter ending March 31,
2004 to shareholders of record of our Series E Convertible Preferred Stock as
of March 31, 2004. The dividends were paid with 6,579 additional shares
of Series E Convertible Preferred Stock. Each share of Series E Convertible
Preferred Stock is convertible into 100 shares of our common stock. The
Company recorded a non-cash deemed dividend of $638,163 related to the issuance
of these dividend shares due to the fact that the conversion price on the
dividend shares was lower than the market price of the Companys common stock
on the date of issue. On June 16, 2004, Mr. David Asplund exercised a warrant to purchase 94 shares
of the Companys Series E Convertible Preferred Stock at $100 per share. On June 22, 2004, the holder of a warrant to purchase 160,000 shares of the
Companys common stock at $1.00 per share exercised the warrant in full. On June 29, 2004, the holder of a warrant to purchase 25,000 shares of the
Companys common stock at $1.00 per share exercised the warrant in full. On May 26, 2004, the Board of Directors declared dividends payable on our
Series E Convertible Preferred Stock for the calendar quarter ending June 30,
2004 to shareholders of record of our Series E Convertible Preferred Stock as
of June 30, 2004. The dividends were paid with 3,256 additional shares of
Series E Convertible Preferred Stock. Each share of Series E Convertible
Preferred Stock is convertible into 100 shares of our common stock. The
Company recorded a non-cash deemed dividend of $289,784 related to the issuance
of these dividend shares due to the fact that the conversion price on the
dividend shares was lower than the market price of the Companys common stock
on the date of issue. 
 ITEM 2.

    MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read the following discussion regarding the Company along with the
Companys financial statements and related notes included in this quarterly
report. This quarterly report, including the following discussion, contains
forward-looking statements that are subject to risks, uncertainties and
assumptions. The Companys actual results, performance and achievements in
2004 and beyond may differ materially from those expressed in, or implied by,
these forward-looking statements. See Cautionary Note Regarding
Forward-Looking Statements. Overview We are a developer, manufacturer and integrator of energy savings technologies,
and building automation systems as well as an independent developer of
scalable, negative power systems. We currently market the EnergySaver, and the
GlobalCommander energy conservation technologies, as well as our independent
development of scalable, negative power systems under the trade name, Virtual
Negawatt Power Plan or VNPP. Electric City is based in Elk Grove Village,
Illinois and is traded on The American Stock Exchange under the symbol ELC.
Our premier energy saving product is the EnergySaver system, which reduces
energy consumed by lighting, typically by 20% to 30%, with minimal reduction in
lighting levels. This technology has applications in commercial buildings,
factories and office structures, as well as street lighting and parking lot
lighting. Combining the technologies of the EnergySaver and GlobalCommander
led to the development of our Virtual Negawatt Power Plan concept, which is
essentially a negative power system which we intend to market primarily to
utilities as a demand response system. It is envisioned that the demand
reduction could be specifically placed across a utility grid targeting
potential hot spots such as particular feeders or substations. We believe
that the Electric City VNPP will be the first demand response system to provide
this level of control to a utility -16-




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##### Table of Contents



without requiring active customer
participation and without impacting a customers operations or ability to do
business. The VNPP can be developed in conjunction with a utility provider, a
utilitys independent power subsidiary or with other sister companies within a
utility family. In some markets, the VNPP can
be developed completely at risk, just as the industry has seen with the
development of independent power plants, or developed with a long-term negative
power purchase agreement with a utility. In October 2003, we entered into an
agreement with Commonwealth Edison (ComEd) to develop the first 50-megawatt
VNPP system, to be located in northern Illinois. We anticipate that
approximately 1,500 EnergySavers will be required to deliver the 50 megawatts
of curtailment envisioned under this contract. We have begun to install
EnergySavers under this program and expect to complete the installation of
units over the next 18 to 24 months. In addition to our EnergySaver system, we
design, install and monitor building control and environmental systems through
our subsidiary Great Lakes Controlled Energy Corporation (Great Lakes). Results of Operations Our revenues reflect the sale of our products, net of allowances for returns
and other adjustments. Revenues of Electric City and its subsidiary are
generated from the sale of products and services, the vast majority of which
are sold in the U.S. Our cost of goods sold consists primarily of materials and labor. Also
included in our cost of goods sold are freight, charges from third parties for
installation of our products, costs of operating our manufacturing facility,
charges for potential future warranty claims, and royalty costs related to
EnergySaver sales. Cost of goods sold also includes the wages and expenses of
our engineering group at Great Lakes. Sales and gross profits depend, in part, on the volume and mix of products sold
during any given period. Generally, products that we manufacture have a higher
gross profit margin than products that we purchase and resell. A portion of our operating expense is relatively fixed, such as the cost of our
facilities. Accordingly, an increase in the volume of sales will generally
result in an increase to our gross margins since these fixed expenses do not
increase proportionately with sales. We have not consistently utilized the
manufacturing capacity of our facility and, therefore, believe that the fixed
nature of some of our expenses would contribute to an increase in our gross
margin in future periods if sales volumes increase. In particular we believe
that our facility in Elk Grove Village can support a sales level of EnergySaver
products of approximately $15 million to $20 million per year without a
significant further investment in fixed assets. Selling, general and administrative (SG&A) expenses include the following
components:  
    
    direct labor and commission costs related to our employee sales
force;  
    
    expenses related to our non-manufacturing management, supervisory
and staff salaries and employee benefits;  
    
    commission costs related to our independent sales representatives
and our distributors;  
    
    costs related to insurance, travel and customer entertainment and
office supplies costs and the cost of non-manufacturing utilities;  
    
    costs related with marketing and advertising our products;  
    
    costs of outside professionals such as lawyers, accountants, and
investor relations professionals;  
    
    research and development expenses;  
    
    costs related to administrative functions that serve to support the
existing businesses of the Company, as well as to provide the
infrastructure for future growth. -17-




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##### Table of Contents



Interest expense for continuing operations includes the costs and expenses
associated with working capital indebtedness, the mortgage on our headquarters
building, a convertible term loan, and various auto loans, all as reflected on
our current and prior financial statements. Also included in interest expense
is amortization of the debt discount which includes the fair value of the
warrants issued to Laurus Master
Fund, as well as the value of beneficial conversion feature attributed to the
Convertible Term Loan. Also reported as interest expense is the amortization
of deferred financing costs related to the credit facility with Laurus Master
Fund. Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003. Our total revenue for the three-month period ended June 30, 2004 declined
$1,113,184 or 66.7% to $555,537 as compared to $1,668,721 for the three month
period ended June 30, 2003. Revenue related to EnergySaver sales declined
approximately $916,000, or 86%, to approximately $150,000 for the three months
ended June 30, 2004 as compared to approximately $1,066,000 for the same period
in 2003. EnergySavers unit sales decreased 87% to 16 units during the second
quarter of 2004 (not including units shipped under the ComEd VNPP) from 123 units
sold during the second quarter of 2003. The decline in EnergySaver revenue is
primarily due to a shift in market response to the
Companys new utility initiative, and in particular the ComEd
and Xcel VNPPs. The ComEd
VNPP agreement was finalized during the third quarter of 2003 and as a result
the Companys in house sales resources have been actively seeking users to
participate in the newly created program. We began shipment of EnergySavers
under the ComEd program late in 2003 with continued shipments during the first
half of 2004, but we have not recognized revenue on any of these shipments. The ComEd VNPP is structured as a service agreement with a 13 year term in
which Electric City will provide up to 50 MWs of curtailment capacity to ComEd
at a fixed price per kilowatt of installed capacity, payable quarterly in
arrears whether the capacity is used or not as the capacity is installed. We
have not recognized any service revenue related to installed capacity, which to
date has been minimal. In order to finance the cost of building and installing
the equipment for the VNPP, we are negotiating to sell the equipment and the
contract to a limited liability company (the LLC) being created by a Chicago
based investment bank. We believe that we have investors who are ready and
willing to fund the LLC, but the closing, including completion of final
documentation, is awaiting installation and host acceptance of equipment worth
approximately $1 million, which we hope to achieve during the third quarter of
2004. We hope that current accounting rules will permit us to recognize
revenue on the transfer of equipment to the LLC, but there is a chance this
will not happen in which case we will have to recognize revenue as service
revenue over the term of the contract. This would result in the
conversion of equipment revenue to annualized service revenue. It is
possible that future VNPPs will be treated similarly, which could
result in annualized service revenue from multiple contracts with
terms of 10 to 15 years. The effect of this treatment would be
to build a base of long-term recurring revenue vs. up-front equipment
revenue. After the first transfer to the LLC, we
anticipate transferring newly installed equipment and receiving payment on a
regular basis. The ComEd agreement is expected to result in shipments of
approximately 1,500 units over the next 18 to 24 months. EnergySaver shipments
are expected to increase in the second half of 2004 as a result of the ComEd
program in combination with continuing and new sales to commercial
customers. We are currently negotiating possible changes to the ComEd
contract, which among other things could significantly increase the
size of the program and provide other benefits to the Company. Revenue from the sale of building automation products and services decreased
approximately $195,000, or 32% to $408,000 during the three month period ended
June 30, 2004, from approximately $603,000 recorded in the same period of 2003.
Revenue in this segment is recognized as work is completed and material is
delivered to the job site, thus will vary based on the level of activity during
a particular period. This segment completed two of the five long-term projects
it was working on during the fourth quarter of 2003 and anticipates completing
another project during the third quarter of 2004. We are hoping to begin work
on one or two long term projects before the end of 2004 and have been working
on various short term retro-fit projects in the interim. We expect the revenue
for this segment to remain largely unchanged in future periods from the level
realized in the most recent quarterly reporting period. Cost of sales for the three-month period ended June 30, 2004 declined $902,858,
or 60.2% to $597,082 from $1,499,940 for the three-month period ended June 30,
2003. Gross profit for the second quarter of 2004 declined $210,326 to a loss
of $41,545 from a profit of $168,781 in the second quarter of 2003. The -18-




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decline
in gross profit is primarily due to the decline in revenue. In addition, the
Building Automation and Controls segment defers recognition of all job related
profits until the completion of the associated project and did not complete any
long-term projects during the second quarter of 2004. This segment anticipates
completing one of its long-term projects during the third quarter of 2004, at
which time it will
recognize any profit associated with the project. Profits in the EnergySaver
business are in part influenced by sales volume due to the fixed nature of our
manufacturing overhead. As volume increases as a result of the ComEd project,
this fixed overhead will be spread over more production, which should
contribute to an improvement in the gross margin in this business segment. SG&A for the three-month period ended June 30, 2004 declined $128,541, or 11.7%
to $974,470, from $1,103,011 for the three-month period ended June 30, 2003.
Reductions in sales commissions and investor relations expenses were the
largest contributors to the reduction in SG&A expense. We expect our SG&A
expense to increase slightly over the balance of the year as we add additional
headcount to ensure proper execution of the ComEd contract. Other expense for the three-month period ending June 30, 2004 increased
$118,115, to $129,133 from $11,018 for the three-month period ended June 30,
2003. Interest expense for the three-month period ended June 30, 2004 includes
amortization of the deferred issuance costs and debt discount related to the
Laurus convertible term loan totaling $117,897. Interest income of $7,372 for
the second quarter of 2004 was $6,052 higher than that recorded in the second
quarter of 2003 due to higher invested cash balances. During the second quarter of 2003 we agreed to sell substantially all of the
assets and most of the liabilities of our Power Management business to a group
of investors that included members of the segments management. The sale
closed on June 3, 2003, effective as of May 31, 2003. As required by SFAS 144
the operating results as well as the loss on disposal for this segment have
been presented as discontinued operations. During the three-month period ended
June 30, 2003 we recorded an operating loss of $57,691 for the segment as well
as a $764,148 loss on the disposal of the segment. Our dividend expense for the second quarter of 2004 decreased $376,368 to
$622,884 from $999,252 for the same period in 2003. We accrued dividends of
$325,600 and $612,268 on our Convertible Preferred Stock during the three-month
periods ended June 30, 2004 and 2003, respectively. The dividends accrued
during the second quarter of 2004 were satisfied through the issuance of 3,256
additional shares of our Series E convertible preferred stock, while the
dividends accrued during the second quarter of 2003 were satisfied through the
issuance of 61,227 shares of our Series A, C and D convertible preferred stock.
We were required to recognize non-cash deemed dividends of $289,784 on June
30, 2004 due to the fact that the conversion price on the shares issued in
satisfaction of the accrued dividend had a conversion price that was lower than
the market price of our common stock on the date of issue. The closing market
price of our stock on June 30, 2004 was $1.89 as compared to $0.95 on June 30,
2003. During the second quarter of 2004 we also incurred a $7,500 deemed
dividend when we agreed to extend the expiration date on warrants to purchase
shares of our Series E Convertible Preferred stock from October 31, 2004 to
December 31, 2004. We agreed to extend these warrants to permit holders who
participated in the redemption and exchange more time to exercise their
warrants so that if they choose to exercise they can do so without violating
the short swing trading rules of section 16(b) of the Securities Act of 1934 or
our insider trading policy which prohibits the trading of our securities during
certain blackout periods prior to the filing of our financial statements.
Dividend expense for the second quarter of 2003 included a $386,984 non-cash
deemed dividend associated with the sale of the Series D Convertible Preferred
stock. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003. Our total revenue for the six-month period ended June 30, 2004 declined
$1,447,695 or 51.3% to $1,371,779 as compared to $2,819,474 for the six-month
period ended June 30, 2003. Revenue related to EnergySaver sales declined
approximately $1,074,000, or 69%, to approximately $471,000 for the six-month
period ended June 30, 2004 as compared to approximately $1,545,000 for the same
period in 2003. -19-




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EnergySavers unit sales declined 71% to 49 units during the
first six months of 2004 (not including units shipped under the ComEd VNPP) from
169 units sold during the first six months of 2003. The decline in EnergySaver
revenue is primarily the result of a shift in the markets
response to
the Companys new utility initiative, and in particular the
ComEd and Xcel VNPPs. The
Companys in-house sales resources have
been focusing on signing up hosts to participate in the ComEd program rather
than on making commercial sales. The Company continues to rely upon
third party distributors and dealers for direct sales of EnergySavers
in markets where a VNPP does not exist. We began shipment of product under the ComEd
program in late 2003 with continued shipments during the first half of 2004,
but we have not recognized revenue on any of these shipments pending completion
of an agreement to transfer the equipment and the ComEd contract to third part
LLC (for additional information please see the discussion of the second quarter
results above). Revenue from the sale of building automation products and services declined
approximately $373,000, or 29% to $901,000 during the six month period ended
June 30, 2004, from approximately $1,274,000 recorded in the same period of
2003. Revenue in this segment is recognized as work is completed and material
is delivered to the job site, thus will vary based on the level of activity
during a particular period. The segment had several large projects that were
particularly active during the first half of 2003 which contributed to the
higher level of revenue during that period. All but one of these projects has
since been completed and been replaced by another long term project and various
smaller projects that the segment is working on during 2004. We expect revenue
for this segment to remain at current levels through the balance of 2004. Cost of sales for the six-month period ended June 30, 2004 totaled $1,383,091
as compared to $2,616,443 for the six-month period ended June 30, 2003. Gross
profit for the first six months of 2004 decreased $214,343 to a loss of $11,312
from a profit of $203,031 during the same period in 2003. The decline in gross
profit is primarily due to the decline in revenue. In addition, the Building
Automation and Controls segment defers recognition of all job related profits
until the completion of the associated project and did not complete any
long-term projects during the first half of 2004. This segment anticipates
completing one of its long-term projects during the third quarter of 2004, at
which time it will recognize any profit associated with the project. SG&A for the six-month period ended June 30, 2004 declined $122,229 or 5.8% to
$2,002,109, as compared to $2,124,338 for the six-month period ended June 30,
2003. Contributing to the decline in SG&A were reductions in salary expense,
sales commissions and charges related to investor relation services. These
reductions were partially offset by increases in legal and marketing expenses. Other expense for the six-month period ending June 30, 2004 increased $465,997
to $489,455 from $23,458 for the same period in 2003. Interest expense for the
six-month period ended June 30, 2004 included amortization of the deferred
issuance costs and debt discount related to the Laurus convertible term loan of
$464,948. Interest income of $11,736 for the first half of 2004 was $8,749
higher than the same period in the prior year due to higher invested cash
balances. During the first half of 2003 we agreed to sell substantially all of the assets
and to transfer most of the liabilities of our Power Management segment to a
group of investors that included members of the segments management. The sale
closed on June 3, 2003, effective as of May 31, 2003. As required by SFAS 144
the operating results as well as the loss on disposal for this segment have
been presented as discontinued operations. During the six-month period ended
June 30, 2003 we recorded an operating loss of $302,503 and a $764,148 loss on
the disposal of the segment. Our dividend expense for the first half of 2004 increased $1,953,661 to
$3,786,905 from $1,833,244 for the same period in 2003. We accrued dividends
of $983,500 and $1,207,977 on our Convertible Preferred Stock during the
six-month periods ended June 30, 2004 and 2003 respectively. The dividends
accrued during the first six months of 2004 and 2003 were satisfied through the
issuance of additional shares of our preferred stock. We were required to
recognize non-cash deemed dividends of $927,947 and $217,119 during the first
six months of 2004 and 2003, respectively, due to the fact that the conversion -20-




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price on these dividend shares was lower than the market price of our common
stock on the date of issue. The increase in this deemed dividend is primarily
the result of the increased difference in the market price of our common stock
relative to the conversion price of the dividend shares on the date of issuance
of these dividend shares. In addition, despite the fact that the redemption
and exchange transaction was
favorable for the Company and its common stockholders (see note 9 to the
financial statements), we were required to record a non-cash deemed dividend on
the transaction of $1,860,458. For accounting purposes the transaction, which
closed in March 2004, was viewed as a redemption for cash and shares of Series
E Preferred stock. The non-cash deemed dividend was determined by comparing
the fair value of the consideration given (the cash and the market value of the
Series E Preferred) to the carrying value of the preferred stock that was
redeemed. The fair value of the consideration given exceeded the carrying
value of the existing preferred primarily due to the fact that the market price
of our common stock was higher on the day the redemption and exchange
transaction closed than it was when the existing preferred stock was originally
issued. During the first half of 2004 we also incurred a $15,000 deemed
dividend when we agreed to extend the expiration date on warrants to purchase
shares of our Series E Convertible Preferred stock from June 30, 2004 to
December 31, 2004. We agreed to extend these warrants to permit holders who
participated in the redemption and exchange more time to exercise their
warrants so that if they choose to exercise they can do so without violating
the short swing trading rules of section 16(b) of the Securities Act of 1934 or
our insider trading policy which prohibits the trading of our securities during
certain blackout periods prior to the filing of our financial statements.
Dividend expenses for the first six months of 2003 also included $386,984 of
non-cash deemed dividends associated with the issuance of the Series D
Convertible Preferred stock. As is more fully described in Note 9 to our financial statements, we completed
a redemption and exchange offering on March 22, 2004 in which we redeemed
538,462 shares of our outstanding Series A, Series C and Series D Convertible
Preferred Stock (the Existing Preferred), and exchanged the remaining
2,104,509 shares of Existing Preferred into 210,451 shares of a new Series E
Convertible Preferred Stock at the rate of 10 shares of Series E Convertible
Preferred Stock for each share of Existing Preferred. The Existing Preferred
Stock carried a dividend rate of 10% payable at the Companys election in cash
or in additional shares of preferred stock during the first three years
following issuance. After the third anniversary of issuance we were required
to pay all dividends in cash and the dividend rate increased by 1/2% every six
months until it reached 15%, where it would remain until the shares were
converted or redeemed. The Series E Preferred carries a 6% dividend that is
payable at the Companys election in cash or additional shares of Series E
Preferred for as long as the shares remain outstanding. The reduction in the
number of outstanding shares of preferred stock, in combination with the
reduction in the dividend rate, will significantly reduce the dilutive effect
of the payment-in-kind dividend on the preferred stock in future periods. Liquidity and Capital Resources As of June 30, 2004, we had cash and cash equivalents of $3,860,205 compared to
$2,467,023 on December 31, 2003. Our debt obligations as of June 30, 2004
consisted of a convertible secured term note of $676,790, a mortgage of
$616,000 on our facility in Elk Grove Village Illinois, and a vehicle loan of
approximately $7,200. Our principal cash requirements are for operating expenses, including employee
costs, the costs related to research and development, advertising costs, the
cost of outside services including those providing accounting, legal,
engineering and consulting services, and the funding of inventory and accounts
receivable, and capital expenditures. We have financed our operations since
inception through the private placement of our common stock, preferred stock
and various secured and unsecured loans. Net cash increased $1,393,182 during the first six months of 2004 as compared
to increasing $226,904 during the same period in 2003. Cash consumed by
operating activities declined 31.4% to $1,871,979 during the first half of 2004
as compared to $2,728,980 during the same period in 2003. Cash used to -21-




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fund
the net loss before changes in working capital, declined $18,843 or 0.9%, to
$2,004,353 during the first six months of 2004 from $2,023,196 during the same
period in 2003. The improvements in cash usage related to the disposal of
discontinued operations were almost completely offset by reductions in gross
profit during the first half of 2004. Changes in working capital generated cash of $132,374 during the first six
months of 2004 as compared to consuming cash of $705,784 during the same period
of 2003. Declines in accounts receivable generated $312,247 during the first
six months of 2003, while increases in inventory and other current assets
consumed $229,097 and $62,100, respectively during the same period. The
decline in accounts receivable resulted from receipt of amounts held as
retention until completion of larger Building Automation and Controls projects
as well as improved collections and the slowdown in sales during the period.
The increases in inventory and other current assets were both related to the
ramp-up in the ComEd program. Included in inventory are EnergySaver units
installed at host locations for the ComEd program for which we have not yet
recognized revenue. Other current assets include installation and shipping
costs related to these EnergySaver units. Declines in accounts payable and
accrued expenses consumed cash of $359,133 and $67,440, respectively during the
six-month period ended June 30, 2004. The decline in accounts payable is
primarily the result of payments by Great Lakes to subcontractors who worked on
long term projects that were completed in the fourth quarter of 2003. The
decline in accrued expenses is primarily due to the payment of accrued
California sales taxes which are paid in January of every year. Increases in
deferred revenue and customer deposits offset the decline in accounts payable
and accrued expenses. Deferred revenue increased $49,065 as a result of the
deferred recognition of profits on building automation projects and other
current assets increased $488,833 due to the receipt of a $500,000 pre-payment
from ComEd for curtailment capacity which was recorded as a customer deposit.
An increase in accounts receivable and other assets of $1,438,211 during the
first half of 2003 was offset by a decline in inventory of $604,330. The
increase in accounts receivable was due in large part to the increase in sales
in the Building Automation and Controls segment and a general slow down in
receivables turnover in both segments. The decline in inventory came primarily
from the Energy Technology segment where we purposely worked to reduce
inventory levels. The combination of changes in accounts payable and accrued
expenses generated $80,549 of cash during the first half of 2003 primarily
related to the increase in business activity in both business segments during
the period. Investing activities consumed cash of $11,804 during the six-month period
ending June 30, 2004 as compared to generating $913,743 during the same period
in 2003. We invested $11,804 and $15,289 in new equipment during the six month
periods ended June 30, 2004 and 2003, respectively. In June 2003, we sold
certain assets and transferred certain liabilities of our Power Management
business, generating cash proceeds of $929,032. Financing activities generated cash of $3,276,965 and $2,042,141 during the
six-month periods ended June 30, 2004 and 2003, respectively. During 2004, we
raised $11,000,000 through the issuance of a package of securities that
included shares of our common stock and 5 year warrants to purchase additional
shares of common stock. We used $7,000,006 of the net proceeds from this
issuance to effectuate a redemption and exchange offer for our Series A, Series
C and Series D Convertible Preferred Stock. We incurred expenses related to
these transactions of $897,135. During the period we also made scheduled
principal payments on our mortgage and auto loan of $19,542 and received
$193,648 in net proceeds from the exercise of warrants to purchase shares of
our common and preferred stock. During 2003, we entered into several private
placement transactions in which we sold securities including shares of our
common stock, shares of our Series D Convertible Preferred stock, preferred
stock warrants and common stock warrants, generating gross proceeds of
$3,169,914, which was partially offset by issuance costs of $301,290. We used
a portion of the proceeds generated from the sale of our Power Management
segment to repay $298,000 in equipment loans and to paydown the outstanding
balance on our revolving line of credit of $500,000. We made scheduled
principal payments of $66,281 on various loans during the first half of 2003
and borrowed $10,000 to finance the purchase of new equipment. In April of
2003, the holder of a common stock warrant paid $27,000 to exercise his right
to purchase common stock at $1.00 -22-




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per share. We also received a payment of $798
during the first half of 2003 from a shareholder, which represented the
short-swing profit inadvertently earned when he purchased shares of our stock
within six months of selling shares, which is a violation of section 16(b) of
the Securities Act of 1934. Our mortgage with American Chartered Bank matures on February 1, 2005, at which
time we will owe a balloon payment of $595,000, unless we refinance or extend
the mortgage prior to the maturity. It is our intent to attempt to refinance
the mortgage with American Chartered Bank or another lender prior to the end of
2004. We currently have a $2 million convertible revolving credit facility with
Laurus Master Fund, Ltd. (Laurus). The revolving credit facility provides
for borrowings of up to the lesser of (i) $2 million or (ii) 90% of our
eligible accounts receivable. We have not borrowed under the facility, thus it
remains fully available to the extent of our eligible receivables. As of June
30, 2004 eligible receivables would support borrowings of approximately
$736,000 under the facility. The revolving credit facility expires on
September 11, 2005 and accrues interest at the rate of prime (currently 4.25%)
plus 1.75%. We have the option of paying interest and principal, or prepaying
all or a portion of the advances under each Secured Convertible Revolving Note,
with shares of our common stock at the fixed conversion price of $2.12 per
share, provided that the closing price of our common stock is greater than
$2.43 per share for the 11 trading days immediately proceeding the payment date
and that the shares are registered with Securities and Exchange Commission. We
have filed a registration statement with respect to these shares. In addition,
Laurus has the option to convert all or a portion of the advances under any
Secured Convertible Revolving Note into shares of our common stock at any time,
subject to certain limitations, at a fixed conversion price of $2.12 per share.
The revolving credit facility is secured by a blanket lien on all of our
assets, except for our real estate. Our ability to continue the development, manufacturing and the expansion of
sales of our products, including the EnergySaver, the GlobalCommander, VNPP and
building automation products, will require the continued commitment of
significant funds. The actual timing and amount of our future funding
requirements will depend on many factors, including the amount and timing of
future revenues, our ability to collect our receivables in a timely manner, the
level and amount of our product marketing and sales efforts, the magnitude of
research and development, and our ability to improve margins. In an attempt to move the Company to a position where it can start to generate
positive cash flow our management has set the following key objectives for cash
flow improvement in 2004:  
    
    Successfully execute on the ComEd contract. Executing on ComEd
includes signing up hosts, installing equipment and transferring the
equipment and contract to a third party investor. We believe that this
is important from several different perspectives. First we anticipate
that it will have a positive impact on our cash flow. Secondly, we
believe it will establish Electric City as a leader in negative power
development, thereby supporting VNPP opportunities with other
utilities. And finally we believe it will lead to increased commercial
sales of the EnergySaver as hosts who participate in the ComEd VNPP but
also have operations outside the ComEd territory gain exposure to the
technology. This project is under contract, therefore we are focusing
a great deal of our resources on this project and have hired and will
be hiring additional personnel as part of our efforts to keep this
project on schedule.  
    
    Increase the profitability of EnergySaver sales. Increasing the
margins earned on EnergySaver sales will also have an immediate and
positive impact on our cash flow. We have seen improvements in
EnergySaver margins over the past two years, but believe that the
product has the potential for significantly higher margins. We believe
that increased volumes that will result from the ComEd program will
lead to higher margins as a result of increased capacity utilization.
In addition, a price increase that we implemented effective January 1,
2004 should also lead to improved profitability of the EnergySaver. -23-




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
    
    Build on the recent project successes at Great Lakes Controlled
Energy to make the Building Controls and Automation business become
profitable. Great Lakes has recently been awarded new business and is
currently working on existing projects that we believe will result in
this
segment turning profitable during 2004. This segment must execute
effectively in order to realize the profitability potential of these
projects.  
    
    Continue to aggressively manage our costs in order to conserve
cash. While we made significant progress in reducing our costs during
the last two years, we must continue to effectively manage all of our
costs so that they do not negate the anticipated improvement in
profitability in our Energy Technology and Building Automation and
Control segments.  
    
    Be prepared to raise additional capital in limited amounts if
necessary to continue to fund operations until the business turns cash
flow positive. Our ability to raise additional capital in the future
will depend a great deal on our ability to make progress toward the
goals outline above. We believe that if we are successful in achieving these priorities we should
have sufficient liquidity to allow us to operate until our operations turn cash
flow positive, hopefully sometime during 2005. Our projections contain certain
key assumptions which may or may not occur. If any of the key assumptions
contained in our projections are proven wrong, we may begin to experience a
liquidity shortage sometime in 2005 that could force us to scale back our
growth plans, or, in the worst case, cease operations. If in the future we find that we need to raise additional capital (which may
require stockholder approval), our existing stockholders will likely experience
dilution of their present equity ownership position and voting rights,
depending upon the number of shares issued and the terms and conditions of the
issuance. Any new equity securities will likely have rights, preferences or
privileges senior to those of our common stock. Cautionary Note Regarding Forward-Looking Statements This discussion includes forward-looking statements that reflect the Companys
current expectations about its future results, performance, prospects and
opportunities. The Company has tried to identify these forward-looking
statements by using words such as may, will, expects, anticipates,
believes, intends, estimates or similar expressions. These
forward-looking statements are based on information currently available to the
Company and are subject to a number of risks, uncertainties and other factors
that could cause the Companys actual results, performance, prospects or
opportunities in the remainder of 2004 and beyond to differ materially from
those expressed in, or implied by, these forward-looking statements. These
risks, uncertainties and other factors include, without limitation, the
Companys limited operating history, the Companys history of operating losses,
customers acceptance of our products, the Companys use of licensed
technologies, risk of increased competition, risk that the Virtual Negawatt
Power Plan concept does not succeed, the Companys commercial scale development
of products and technologies to satisfy customers demands and requirements, the
possible need for additional financing and the terms and conditions of any
financing that is consummated, the limited trading market for the Companys
securities, the possible volatility of the Companys stock price, the
concentration of ownership, and the potential fluctuation in the Companys
operating results. For further information about these and other risks,
uncertainties and factors, please review the disclosures included under the
caption Risk Factors in Electric Citys filings with the Securities and
Exchange Commission. Except as required by Federal securities laws, Electric
City undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, changed
circumstances or any other reason, after the date of this document. -24-




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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The only significant exposure we have to market risk at this time is the risk
of changes in market interest rates. The interest rates on our debt facilities
are variable and change with changes in the prime rate. The interest rate on
our convertible term loan is equal to the prime rate (currently 4.25%) plus
1.75% or 6%, whichever is greater. The interest rate on our mortgage is
equal to the prime rate plus 1/2%. If the prime rate were to increase 1
percentage point, the annual interest cost on the term loan and mortgage would
increase by approximately $11,000. 
 ITEM 4. Controls and Procedures  a.
    
    Evaluation of disclosure controls and procedures.Our chief executive officer and chief financial officer, after evaluating
the effectiveness of the Companys disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) as of the end of the period
covered by this report, have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this
report.b.
    
    Changes in internal controls.There were no significant changes in our internal controls or in other
factors that could significantly affect the Companys internal controls
during the period covered by this report.c.
    
    Disclosure controls and procedures.Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure. -25-




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PART II. OTHER INFORMATION 
 ITEM 2. Changes In Securities  (1)
    
    On June 16, the holder of a warrant to purchase 94 shares of our Series E
Convertible Preferred Stock at $100.00 per share exercised the warrant in
full.  (2)
    
    On June 22, 2004, the holder of a warrant to purchase 160,000 shares of
the Companys common stock at $1.00 per share exercised the warrant in
full.  (3)
    
    On June 29, 2004, the holder of a warrant to purchase 25,000 shares of
the Companys common stock at $1.00 per share exercised the warrant in
full.  (4)
    
    On May 26, 2004, the Board of Directors declared dividends payable on our
Series E Convertible Preferred Stock for the calendar quarter ending June
30, 2004 to shareholders of record of our Series E Convertible Preferred
Stock as of June 30, 2004. The dividends were paid with 3,256 additional
shares of Series E Convertible Preferred Stock. Each share of Series E
Convertible Preferred Stock is convertible into 100 shares of our common
stock. The Company recorded a non-cash deemed dividend of $289,784
related to the issuance of these dividend shares due to the fact that the
conversion price on the dividend shares was lower than the market price of
the Companys common stock on the date of issue. No underwriters were involved in any of the transactions described above. All
of the securities issued in the foregoing transactions were issued by us in
reliance upon the exemption from registration available under Section 4(2) of
the Securities Act, including Regulation D promulgated thereunder, in that the
transactions involved the issuance and sale of our securities to financially
sophisticated individuals or entities that were aware of our activities and
business and financial condition and took the securities for investment
purposes and understood the ramifications of their actions. The purchasers also
represented that they were accredited investors as defined in Regulation D
and/or were acquiring such securities for investment for their own account and
not for distribution. Other than the shares issued pursuant to the exercise of
the warrants referred to in (2) and (3) above, which have been registered under
the Securities Act of 1933, as amended, all certificates representing the
common stock so issued have a legend imprinted on them stating that the shares
have not been registered under the Securities Act and cannot be transferred
until properly registered under the Securities Act or an exemption applies.
Proceeds of the sales referred to in (1), (2) and (3) above were used for
general corporate purposes. 
 ITEM 4. Submission of Matters to a Vote of Security Holders. On May 26, 2004, we held our annual meeting of stockholders for the fiscal year
ended December 31, 2003. At the annual meeting, six nominees to our Board of
Directors were elected to hold office for a one year term ending at our 2005
annual meeting of stockholders or until their respective successors were duly
elected and qualified. The number of directors has been set at 12 by
resolution of the Board. As of the record date of April 20, 2004, there were
40,922,021 shares of our common stock outstanding. Pursuant to a Stockholders Agreement, as amended, between the Company and the
holders of our Series E Convertible Preferred Stock (the Series E Preferred
Stock) and the Certificate of Designations governing the Series E Preferred
Stock, the holders of the Series E Preferred Stock have the right to elect up
to (i) four directors for so long as at least 90,000 shares of Series E
Preferred Stock remained issued and outstanding, (ii) three directors for so
long as at least 65,000 but less than 90,000 shares of Series E Preferred Stock
remained issued and outstanding, (iii) two directors for so long as at least
45,000 but less than 65,000 -26-




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shares of Series E Preferred Stock remained issued and outstanding and (iv) one
director for so long as at least 20,000 but less than 45,000 shares of Series E
Preferred Stock remained issued and outstanding. If less than 20,000 shares of
Series E Preferred Stock remain issued and outstanding, unless otherwise
provided by law, each holder of record of Series E Convertible Preferred Stock
has the right to vote on an as-converted basis together with the holders of
Common Stock on all matters on which holders of Common Stock are entitled to
vote, including the election of directors. On April 20, 2004, the preferred stockholders held 217,030 shares of the Series
E Preferred Stock. Accordingly, the holders of the Series E Preferred Stock
were entitled to elect up to four directors (out of 12) to our board. Except
for the election of directors nominated by our Board of Directors for election,
holders of the Series E Preferred Stock are entitled to vote with the holders
of our Common Stock on an as-converted basis on all matters on which our
holders of Common Stock are entitled to vote. As of the record date, there were 40,922,021 shares of our common stock
eligible to be voted for the election of directors, of which 36,759,287 shares
or 89.8% were represented in person or by proxy at our annual meeting. The
directors elected included Messrs. David R. Asplund, John C. Bukovski, Robert
J. Manning, John P. Mitola, Gerald A. Pientka, and Michael S. Stelter, who were
all of the nominees, with results for each director as follows: Director
    
    For
    
    WithheldDavid R. Asplund
    
    
    36,634,101
    
    
    
    125,186John C. Bukovski
    
    
    36,631,217
    
    
    
    128,070Robert J. Manning
    
    
    36,631,917
    
    
    
    127,370John P. Mitola
    
    
    36,635,401
    
    
    
    123,886Gerald A. Pientka
    
    
    36,634,431
    
    
    
    124,856Michael S. Stelter
    
    
    36,634,751
    
    
    
    124,536
 Other directors whose terms in office continue are Frederic F. Brace, Felicia
A. Ferguson and Robert D. Wagner, Jr., all of whom were appointed by the
holders of our Series E Preferred Stock. 
 ITEM 6. Exhibits And Reports On Form 8-K.  (a)
    
    Exhibits  31.1
    
    Certificate of Chief Executive Officer pursuant
to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    Certificate of Chief Financial Officer pursuant
to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification of the Chief Executive Officer of
the Corporation Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code Pursuant to Section 906 of
the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer of
the Corporation Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 -27-




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(b)
    
    On May 3, 2004, the Company filed a report on Form 8-K
announcing that it had begun to mail its annual meeting material and
releasing a copy of its letter to shareholders.(c)
    
    On May 13, 2004, the Company filed a report on Form 8-K
announcing the financial results of the quarter ended March 31,
2004. 
 SIGNATURES In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. ELECTRIC CITY CORP.:Dated: August 16, 2004
    By:
    /s/ John MitolaJohn MitolaChief Executive Officer (principal
executive officer) Dated: August 16, 2004
    By:
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer (principal
financial and accounting officer) -28-